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Sun-soaked ex-British colonies

Kitty Miv, Editor
18 October, 2012

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

Malta, one of the ten countries which enlarged the EU in 2005, seems to have made a better fist of its natural and artificial advantages than the other sun-soaked ex-British colonies in the Mediterranean, Cyprus and Gibraltar, and now it has launched a neat scheme to encourage retirees to take up residence there. Gibraltar, being so small, can't encourage too many immigrants, so its HINWI scheme is rather aimed at high-earning executives, while Cyprus seems too introverted to focus on specific incentives for immigrants, although with a 5% tax rate for pension income, perhaps it hardly needs to. Where Malta has really shone is in e-commerce, building a formidable position in e-gaming, while Gibraltar seems to have frittered away a good early lead in that sector. Cyprus is a non-starter in the e-commerce stakes, and is still busy trying to pass a law to ban e-gaming rather than encouraging it. Now offshore gas discoveries will allow it to waste the next ten years, just as the housing boom caused it to waste the last ten. Malta has been forced to live off its wits, and is building a secure economic future. No-one could have guessed it 20 years ago.

To some people's surprise, the French Senate has adopted the EU's Fiscal Pact, although it took an unholy alliance of left and right to get it through. Surprise, because France is one of the least likely countries to give up such a large slice of its treasured sovereignty. This is the agreement between 26 EU member states to adopt a strict budgetary regime which David Cameron famously repudiated last December. Since then the Czech Republic has also excluded itself from the treaty, but the remaining 25 countries are forging ahead. Why do I improbably support an EU initiative, when I am usually against anything that emanates from Brussels? Because Europe has to go forward or backward, not hang around bleeding to death. I don't actually mind which way it goes, but agreement to the fiscal pact is a clear indication that it is going forward, putting national finance ministries under orders from Brussels, to stop their mindless, politically-inspired spending. Whether it will work, when Maastricht, which was supposed to do the same thing, was blown apart by the very countries (France and Germany) which now lead the pack, is another question. But this time the safeguards and the punishments for transgression are far stronger than with Maastricht. So it may work, and I hope it does.

Canada's fiscal results pay testament to a consistent and successful attempt to reduce both taxes and spending, something that governments often claim they are doing, but seldom achieve in practice. Canada must be one of the very few countries where government spending actually fell last year as a proportion of GDP. And its debt is a miserly 33%. This makes it a good place to do business, so it gets a gong.

Amazingly, the US Congress still hasn't abolished the Commerce Department, despite my cogently argued pleas. Now that Commerce has unburdened itself of a ludicrously excessive demonization of Chinese solar cell manufacturing (how can you 'dump' items at a margin of 249.96%?), can't everyone see that apart from incensing the country's biggest trading partner, this behaviour is shredding the administration's trade credentials and doing serious damage to a major 'green' initiative (because the only result of doubling the cost of solar panels will be to throttle the growth of renewable energy). And all in response to the protectionist yelping of a tiny group of uncompetitive manufacturers. I know this is the second bad mark I have given the US on this score, but it is deserved; and when (not if, I suppose) the International Anti-Trade Comisssion gives its 'affirmative determination', there'll be another one. The ITC should be abolished as well as Commerce. I suppose I should be giving the US a star for allowing businesses to make money regardless of economic sanity, but try telling that to the solar panel installation firms that will go out of business as a result of the anti-dumping duties.

Austria has published its budget for 2013, gloating over the extra cash that is going to roll in from the deal with Switzerland and from the financial transactions tax. It expects 1% growth next year - well, we'll see - but tax receipts are expected to rise by 5%, while expenses will be broadly flat over 2012 but 11% higher than in 2011. Debt will rise slightly to 76% of GDP. Seen from the perspective of countries with collapsing economies like Greece, Italy, Spain and Portugal (with France soon to join the club) this may seem like a good performance. To me it is lamentable: for all the government's fine words, nothing is being done to cut back on costs, and the solution to all problems is simply to increase taxation. If there is a EUR5bn windfall to come from the Swiss deal (I am guessing - they don't say) then it should be set straight against debt, not used to avoid painful cuts.

The stolen tax-disc saga is grinding on in Germany, with another opposition-controlled state (Rhineland-Palatinate) threatening to buy a disc of Swiss bank account details. The practice has been legitimized by the Constitutional Court providing the stolen data is used in criminal investigations. But what does that do other than criminalize a large number of Germans who were playing hide-and-seek with the tax authority? You may say that cheating on your taxes is criminal and deserves to be punished, but hold hard! Imagine that your grand-dad, on the run from the Nazis in 1935, took a trunk-load of gold francs to Switzerland and put them in a bank vault. There they sit, converted by your father into ten million euros' worth of zero-coupon corporate bonds in 2005 after the Savings Tax Directive came in. He died last year, and now they're yours. You live in a Rhenish village near your solar-panel factory (no chance of getting back the castle in Silesia stolen by the Russians in 1945) and you're in deep discussion with your lawyers and accountants as to how to handle the inheritance tax issues, whether to wait for the Swiss/German deal or not, and now suddenly you're going to be a criminal! The execration I'm giving to Germany is not for pursuing undeclared wealth, it's for being disorganized enough not to have resolved this affair long ago, and as a result of its procrastination, dragging worthy citizens through the mire. Of course our rich friend will go to the taxman, open a negotiation, and there will be a settlement; but he should not have been put in this situation in the first place.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 23rd) three countries are given encomiums and three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany has a ranking of – 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so it's now in neutral territory. Next week it will drop back to minus one.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but hopefully one day they will become useful for decision-making, even if for the moment it is all just an amusing game. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:
Canada walks the walk
France being communautaire!
Malta makes itself conspicuous

And Kitty's Execrations:
Austria taxing and spending
Germany on the fence
United States turns anti-green





About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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